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- The Future of Global Economy: Fragmentation and Its Impacts Explained
The Future of Global Economy: Fragmentation and Its Impacts Explained
Discover the repercussions of a deglobalized economy, with countries imposing tariffs, disrupting trade, and favoring domestic industries. Could this lead to another recession or unexpected opportunities for strategic investors? Explore insights from economic research and key events like Brexit, Trump’s trade war, and Russia's actions, to understand the emerging trends in fragmentation and its implications.
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Video Transcript
The global economy is fragmenting into blocks of countries that are slapping each other with tariffs,
restricting trade of crucial goods and subsidizing their own industries to gain an unfair advantage against other nations.
This is a remarkable change from just a couple of years ago when Russia and China joined the World Trade Organization
and globalization seemed unstoppable.
So, is fragmentation the future of the global economy and if it is, does that mean that
we are heading for another recession or inflation spike in which groceries and gas prices again
get out of control?
Or could it be that there's actually some unforeseen silver lining, especially if you invest
in certain strategic sectors or if your economy managed to become a so-called connector economy?
To answer these questions, I've immersed myself in the latest economic research on fragmentation
and how previous events like Brexit, Trump's trade war against China and Russia's invasion
of Ukraine can inform us about what a fragmented global economy will look like.
But before we can understand the future of fragmentation, let's first discuss how we got
here with a quick recap of the previous eras of globalization and fragmentation.
You see, if you go back in time, you will see that a pattern of seemingly unstoppable globalization
and then damaging fragmentation is really nothing new.
It happened before.
Specifically, the first golden age of globalization happened from 1870 to 1914, and as you can
see here in this chart, it was characterized by relentlessly increasing trade as a percentage
of the global economy. However, that era came crashing down when the first world war started
during which the global economy fragmented into an allied and a central power block.
Then, after trade initially seemed to recover it once again, collapsed as countries increasingly
introduced tariffs, trade barriers and subsidies for their own industries. In response to the
Great Depression. This eventually got so bad that the world economy once again fragmented
into two blocks, the Allied and the Axis powers, which after some brief economic skirmishes
were quickly at each other's throat for real during the Second World War, reducing
a much of the global economy to ashes.
However then, even though the world was once again fragmented into two rivaling blocks,
trade did increase quite a bit within the capitalist block and between unaligned countries during
the Breton Woods era of 1945 to 1980.
And while trade never quite reached the levels of the first golden age of globalization,
the Breton Woods era is still often referred to as the second wave of globalization, as
trade did recover some of its earlier losses.
However, this awayve built in comparison to the third wave of globalization which started
in 1980 as the world, unfragmented when China started opening up its economy.
At the same time, the elections of Ronald Reagan in the US and Marcus Tatcher in the UK are
short in an era in which politicians embraced free trade, free movement of money across
borders and the free movement of people.
And so, unsurprisingly, trade as a percentage of global GDP soared much higher than ever before,
especially after previously communist economies like Eastern Europe and Russia opened up to the world
as well. And while such hyper globalization came at a price for Western workers who saw good
paying factory jobs move overseas, Western politicians were willing to pay that price as they came
to believe that an increasingly interconnected and equal global economy would mean that previously
autocratic countries would become increasingly democratic and unwilling to go to war as they
had too much to lose from something as senselessly destructive as a war.
However, while this strategy seemed to have worked for Eastern Europe, which indeed became
pretty democratic as it got wealthier, there were already some early signs that Russia
Russia and China wanted to make their economies less dependent on the West, rather than
more.
The first sign was that when Russia annexed Crimea in 2014, it combined that with a ban on
